Bitcoin Price Analysis: Preparing for Hard Fork Eventualities

Currently, there is growing support to split Bitcoin into two different currencies via a hard fork: Bitcoin Unlimited (BU) and Bitcoin Core. BU would remove the 1MB block size ceiling entirely. There is also another proposal, Segregated Witness (SegWit), which would be adopted through a soft fork and raise the block size ceiling to ~4MB and also allow for further protocol improvements like Lightning Network which would reduce the burden on block size even further with off-chain open payment channels.

From a trading perspective, a hard fork creates great uncertainty in the near to medium term future. Ethereum is an example of a digital currency with a large market capitalization, currently at $3.9 billion, which went through a total of four hard forks, one of which split the currency into Ethereum Classic, which continues to be actively mined and traded. Although Ethereum recently made new all-time highs (ATH) in price and market capitalization, 2016 was a bearish year overall for the currency.

It is unknown how a hard fork would affect Bitcoin price, a digital currency with $17–20 billion market capitalization, but don’t expect traders to welcome the move with open arms. It’s possible that the hard fork reality is already being priced in, but the full ramifications of two different Bitcoins won’t be known until after the hard fork occurs. Uncertainty generally creates bearish price action, and uncertainty regarding the underlying principles of the Bitcoin protocol certainly has many traders and investors concerned.

Although BU could split off at any time, it is more likely that the hard fork would occur between at 51–75% miner support. Follow the BU and SegWit proposal signalling breakdown per block here.

It is important to have a trading plan for every possibility and, because a hard fork is becoming more and more likely at this point, finding support zones on high time frames is important. Using information from the entire trend so far, beginning in late 2015, we can find these zones.

The most basic support can be found drawing a simple diagonal line from the extreme lows of the trend. A second mathematical support can be found using a large mathematical average of the previous price. I prefer the 200 period estimated moving average (EMA). Lastly, and perhaps the most important, drawing a fibonacci retracement from the high and low of the entire trend shows very obvious horizontal support and resistance zones. The 0.236 fibonacci level showing horizontal resistance of the 200+ day ascending triangle and horizontal support when the Bitfinex hack became public knowledge on August 2nd. The 0.5 fibonacci level showing horizontal resistance before a return to the previous ATH and showing horizontal support after the first of many People’s Bank of China announcements.

With the diagonal trendline, 200EMA, and 0.618 fibonacci level showing a strong confluence of support at ~$690, I would expect this to be the return to mean zone should price fall much further to the 50% retracement level at $758. An example of this would be the rejection wick during the Bitfinex hack on August 2nd. Although price dipped far below the 200EMA, the close for the day occurred above the 200EMA. Unlike the Bitfinex hack, which occurred as a singular event and was over, a hard fork would represent ongoing uncertainty into uncharted territory. This would suggest an immediate return to mean may be less likely.

For the immediate term, on the one hour time frame, a few things are beginning to emerge:

A rising wedge is often a reversal pattern which can certainly break upwards but more often than not represents bearish price action upon resolution — in this case, bearish continuation. The wedge gets tighter and tighter until a decision is made. Wedges like to break when ¾ full or greater, which brings the price to approximately $1100: a round even number representing psychological resistance which is also 50% of the most recent downward move.

We also notice a descending volume profile which can be read in one of two ways. Either price is consolidating for a greater move in general, or, this represents a bearish divergence showing a higher highs in price on lower volume, which would suggest weakening bullish momentum.

Lastly, the RSI is showing a support trendline with multiple touches. An hourly candle close with RSI below this trendline would suggest a breakdown in price as well. There is no divergence currently on RSI.

Summary

1. The possibility and likelihood of a hard fork creates a substantial opportunity for large bearish price action.

2. A basic trading plan for a large market event includes basic support and resistance zones of any given trend. In this case, a 50% retracement would bring price to ~$760 and a return to mean would bring price to ~$900.

3. Watch for rising wedge resolution and a retest of the previous local low in the immediate term.